CHAPTER 3 Product Costing and Cost Accumulation in

CHAPTER 3 Product Costing and Cost Accumulation in a Batch Production Environment Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Product and Service Costing Financial Accounting Product costs are used to value inventory and to compute cost of goods sold. Managerial Accounting and Cost Management Product costs are used for planning, control, directing, and management decision making. 3 -2

Flow of Costs in Manufacturing Firm 3 -3

Types of Product-Costing Systems Process Costing Job-Order Costing F Used for production of large, unique, high-cost items. F Built to order rather than mass produced. F Many costs can be directly traced to each job. F TWO TYPES: F Job-shop operations F Products manufactured in very low volumes or one at a time. F Batch-production operations F Multiple products in batches of relatively small quantity. 3 -4

Types of Product-Costing Systems Process Costing Job-Order Costing F Typical job-order cost applications: v Special-order printing v Building construction F Also used in the service industry v Hospitals v Law firms 3 -5

Types of Product-Costing Systems Process Costing Job-Order Costing F Used for production of small, identical, low cost items. F Mass produced in automated continuous production process. F Costs cannot be directly traced to each unit of product. F Typical process cost applications: F Petrochemical refinery F Paint manufacturer F Paper mill 3 -6

Accumulating Costs in a Job-Order Costing System The primary document for tracking the costs associated with a given job is the job-cost record. Let’s investigate using the AFB Company 3 -7

Job-Order Cost Accounting 3 -8

Job-Order Cost Accounting A materials requisition form is used to authorize the use of materials on a job. Let’s see one 3 -9

Job-Order Cost Accounting Timothy Williams 3 -10

Job-Order Cost Accounting 3 -11

Job-Order Cost Accounting Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee. Let’s see one 3 -12

Employee Time Ticket 3 -13

Job-Order Cost Accounting 3 -14

Actual and Normal Costing Actual direct material and direct labor combined with actual overhead. Actual direct material and direct labor combined with predetermined overhead. Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. 3 -15

Manufacturing Overhead Costs Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. POHR = Budgeted manufacturing overhead cost Budgeted amount of cost driver (or activity base) Overhead applied = POHR × Actual activity Based on estimates, and determined before the period begins Actual amount of the allocation base, such as direct labor hours, incurred during the period 3 -16

Manufacturing Overhead Costs Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. POHR = Budgeted manufacturing overhead cost Budgeted amount of cost driver (or activity base) Overhead applied = POHR × Actual activity Recall the Aluminum Boat example where: Overhead applied = $30 per DLH × 600 DLH = $18, 000 3 -17

Job-Order Cost Accounting Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct labor hours (DLH). Let’s do it 3 -18

Job-Order Cost Accounting 3 -19

Job-Order Cost Accounting 3 -20

Job-Order Cost Accounting 3 -21

Job-Order Costing Document Flow Summary Let’s summarize the document flow we have been discussing in a job-order costing system. 3 -22

Job-Order Costing Document Flow Summary Production Order for Job Material Requisition Labor Time Records The production order for the job authorizes the start of the production process. The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Apply Manufacturing Overhead Actual Cost Driver (or Activity Base) X Predetermined Overhead Rate 3 -23

Job-Order System Cost Flows Let’s examine the cost flows in a job -order costing system. We will use T-accounts and start with materials. 3 -24

Job-Order System Cost Flows Raw Materials • Material Purchases • Direct Material • Indirect Material Work in Process (Job-Cost Record) • Direct Material Mfg. Overhead • Indirect Material 3 -25

Job-Order System Cost Flows Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Are you with me? 3 -26

Job-Order System Cost Flows Wages Payable • Direct Labor • Indirect Labor Work in Process (Job-Cost Record) • Direct Material • Direct Labor Mfg. Overhead • Indirect Material • Indirect Labor 3 -27

Job-Order System Cost Flows Wages Payable • Direct Labor • Indirect Labor Mfg. Overhead • Indirect • Overhead Material Applied to Work in • Indirect Process Labor Work in Process (Job-Cost Record) • Direct Material • Direct Labor • Overhead Applied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later. 3 -28

Job-Order System Cost Flows Now let’s complete the goods and sell them. Still with me? 3 -29

Job-Order System Cost Flows Work in Process (Job-Cost Record) • Direct Material • Direct Labor • Overhead Applied • Cost of Goods Mfd. Finished Goods • Cost of Goods Mfd. • Cost of Goods Sold 3 -30

Job-Order System Cost Flows Let’s return to AFB Company and see what we will do if actual and applied overhead are not equal. 3 -31

Overhead Application Example Actual Overhead costs for the year: $5, 050, 000 Actual direct labor hours worked for the year: 170, 000 Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30. 00 per DLH × 170, 000 DLH = $5, 100, 000 Applied overhead exceeds actual overhead by $50, 000 This difference is called overapplied overhead. 3 -32

Overapplied and Underapplied Manufacturing Overhead $50, 000 may be allocated to these accounts. $50, 000 may be closed directly to cost of goods sold. OR Work in Process Finished Goods Cost of Goods Sold AFB Company’s Method 3 -33

Overapplied and Underapplied Manufacturing Overhead Summary 3 -34

Schedule of Cost of Goods Manufactured 3 -35

Schedule of Cost of Goods Sold 3 -36

Two-Stage Cost Allocation Stage One: Costs assigned to pools Cost pools Indirect Labor Indirect Materials Other Overhead Department 1 Department 2 Department 3 3 -37

Departmental Overhead Rates Stage One: Costs assigned to pools Cost pools Stage Two: Costs applied to products Indirect Labor Indirect Materials Other Overhead Department 1 Department 2 Department 3 Direct Labor Hours Machine Hours Raw Materials Cost Products Departmental Allocation Bases 3 -38

Job-Order Costing in Nonmanufacturing Organizations THE JOB Cases Missions Programs Contracts 3 -39

End of Chapter 3 3 -40